Question

Lynda Jones College Plan On her 10th birthday Linda Jone's parents decide to deposit $4,000 in a 529 account for their daughter to go to college. They intend to put an additional $4,000 in the account each year on her 11th, 12th, ..., 17yh birthdays. Assume all account balances will earn 8% per year. On Lynda's 18th, 19th, 20th, and 21st birthdays, her parents will withdraw $20,000 to pay for Linda's college education. Questions: Is the $4,000 savings per year sufficient to cover the anticipated college expenses? Is Linda's 529 account underfunded? What should be the annual deposit in Lynda's 529 account to cover entirely her tuition and fees? What will be the PV of Lynda's college tuition on her 18th birthday? Summarize the results of your analysis and provide your recommendation in this quizz. Create a spreadsheet and submit it in you Drop Box.

Answer 1

Answer:

Is the $4,000 savings per year sufficient to cover the anticipated college expenses?

• No, since the maximum withdrawal per year (for 4 years) earning an 8% interest rate is $12,846.23. Her parents will be $7,153.77 short every year.

Is Linda's 529 account underfunded?

• Yes, her account will have $42,548 when she turns 18 and that isn't enough to cover her college expenses.

What should be the annual deposit in Lynda's 529 account to cover entirely her tuition and fees?

• $6,227.51

What will be the PV of Lynda's college tuition on her 18th birthday?

• If Lynda's parents want to cover her college expenses, they need to have $66,242 on her 529 account.

Explanation:

Lynda's 529 account will have the following balance when she is 18:

future value = annual payment x annuity factor (FV annuity factor, 8%, 8 periods) = $4,000 x 10.637 = $42,548

her parents will make 4 withdrawals:

present value = annual withdrawal x annuity factor (PV annuity factor, 8%, 4 periods)

maximum annual withdrawal = $42,548 / 3.3121 = $12,846.23

required balance = $20,000 x 3.3121 = $66,242

annual payment = $66,242 / 10.637 = $6,227.51